Commentary, 5/6 2004

Published Jun 17, 2004
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Snip, Snap Snute…

In Norwegian, an eventyr is a story that an English speaker might describe as a fairytale or adventure. As in English, these types of stories follow a formula, beginning with the Norwegian equivalent of “Once upon a time…” (Det var en gang…). Typically, as is most likely the case the world over, such stories involve a deserving, honest person who’s elevated in class or wealth beyond his or her wildest dreams.

During the last three decades, Norwegians have often referred to the country’s discovery and subsequent exploitation of the Norwegian Continental Shelf’s oil and gas as the Norsk Eventyret – the Norwegian Adventure. And up until the last few years it’s been quite an adventure, with mega-finds that have fuelled Norway’s economy and financed an astonishing amount of oil and gas technological development that has placed the country in the forefront in the export of raw materials and expertise. Smaller discoveries have also played a part, but they are often passed over, not only because they cannot compete with the proportions of an Ekofisk or Ormen Lange, but because they are deemed unprofitable.

Now, we see declining production rates and most often hear the NCS referred to a mature. Yet the Norwegian Petroleum Directorate tells us that although the NCS is mature, there remains – from what we can conclude from today’s data – almost as much recoverable oil and gas as has already been extracted.

So why the production decline? The remaining oil and gas has yet to be discovered or is to be found in smaller, undeveloped fields. So the simple answer is cost – the cost of exploration and development and the cost built into the system of taxation. Last year’s Kon-Kraft report addressed these costs and recommended tax incentives to boost NCS activities.

The Norwegian Ministry of Petroleum and Energy has now released it’s answer to the Kon-Kraft report in the form of a White Paper (Stortingsmelding nr. 38) addressed to the Norwegian Parliament. In the English version of the announcement for the White Paper, the Ministry claims, “The cost level must be reduced. Industrial parties have the main responsibility.” The incentives proposed do more to encourage exploration and tail-end production. But, two question remain. Will this be enough to encourage development of smaller and marginal discoveries? And how much responsibility is the Government willing to take when is comes to cost?

It’s no secret that oil and gas companies doing business on the NCS do so at a smaller profit margin. Even the home-grown companies Norsk Hydro and Statoil do a great deal of business abroad, not only because it strengthens their international competitive presence, but because the profits are better. And as businesses responsible to their investors, the profits must be there. Even these home-grown companies find it difficult to be financially successful on the NCS.

Aside from the White Paper’s suggestions for stimulating exploration, some discussion has centred on tax relief for new fields and aging fields. But will these proposals prompt companies to revisit discoveries that were deemed too small to show a profit? Will more independents decide to come to the NCS? And the biggest question of all: Will the Parliament consider changes to the 50% special oil tax? Perhaps now is the time to introduce a progressive tax – something similar to the personal income tax system – so that operating a marginal field can be profitable as well.

The Norsk Eventyret is at a critical juncture. The Parliament’s decision on such issues – however it decides – will have a significant impact on the outcome of the story.

Snip, Snap, Snute: så er eventyret ut – so the adventure is over – is the Norwegian signal that the story’s end has come. Hopefully, the Ministry’s White Paper is not that signal.

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